When stock markets are crashing all around you, as they have been this week, it pays to keep a cool head.
That is the view of Paul Smith, a risk management consultant who has been working in Dubai for 10 years.
Before moving to the UAE, Mr Smith, 52, worked as an independent financial adviser in Hong Kong and Tokyo. He saw a number of stock market storms first-hand, and the advice he gave to his clients then still applies today.
“Investing in stocks and shares should give you higher potential rewards than cash, but you have to put up with plenty of short-term volatility along the way,” he says.
Provided you understand the risks and are investing for the long term – say five, 10 or 20 years – you do not have to be overly concerned about the kind of shocks we have seen this week, Mr Smith says. “Market scares don’t bother me. I just hang on to my investments and wait for them to recover their lost value.”
Keeping your cool is easier if you can talk to a trusted independent financial adviser about how to adjust your portfolio, Mr Smith says. His own investments are managed by the specialist adviser AES International.
Ashley Owen, the head of investment strategies at AES, says that at times like these investors need to take a long-term view. “Brave investors could even see the collapse as a good buying opportunity, particularly in developed markets such as the US that have arguably been a little overheated of late.”
He suggests buying into regions that should recover relatively quickly. “That means broad indexes such as the MSCI World or S&P 500, rather than into sectors such as oil and gas, which may be going through a more long-term cyclical downturn.”
Mr Owen says ordinary investors must resist the temptation to join the ranks of the panic sellers and crystallise their losses by selling up their existing stocks and funds.
Expatriate investors cannot be blamed for feeling nervous, however, as many will have had thousands of dollars wiped off the value of their pension and investment portfolios in just a few days.
Some kind of correction was inevitable at the tail end of what has been the third-longest bull market in the past century, starting in the spring of 2009.
Only two rallies have lasted longer. The first ended in the Wall Street crash in 1929; the other blew up in the technology crash of 2000.
The storm has been brewing for some time but really whipped up at the start of this week on what the Chinese now call Black Monday. The Shanghai Composite Index fell 8.5 per cent in a single day, the biggest sell-off for nine years, followed by another 7.6 per cent drop on Tuesday. That left it down more than 40 per cent since June, wiping out all of this year’s gains.
US and European markets notched up one-day losses of up to 5 per cent on Monday. In the UAE, the Dubai Financial Market General Index fell 6.9 per cent on Sunday and another 1.4 per cent on Monday. Volatility continued through the week.
Analysts had been debating whether China would suffer a hard economic landing for years, and worries became more acute as manufacturing, imports and exports all suffered sharp falls.
Heavy-handed moves by the Chinese authorities to ban short-selling and prevent shareholders with stakes of more than 5 per cent from selling shares may ultimately have backfired. A bungled currency devaluation did not help.
Alastair McCaig, a market analyst at the global online trading specialist IG, says: “The Chinese are learning a lesson that many have learnt before – that you can only fight market forces for so long before you end up losing.”
China is not the only concern. The endless euro-zone crisis and signs of slowing growth in the United States have also hit sentiment.
Mr McCaig says that once sentiment turns negative, it can be hard to reverse. “Panic rather than prudence has been driving traders’ thinking.”
The sell-off has arguably been worsened by the fact that trading volumes are generally low in August with so many traders on holiday from their desks, which exaggerates market movements.
China is not the only emerging market in trouble. Stock markets and currencies in Brazil, Russia, South Africa, India, Malaysia, Turkey and others have plunged in recent weeks.
The crash may have won them a reprieve, however, as the US Federal Reserve is now less likely to hike interest rates in September.
Emerging markets have collectively borrowed more than US$5.7 billion and this leaves them vulnerable to a dollar shock, as the cost of servicing that debt will rise if US rates start climbing.
With emerging markets now contributing half of global GDP, that shock will be transmitted to the rest of the world.
But with markets in free fall, analysts have largely ruled out the chance of the Fed raising rates in September.
Patrick Gordon, the head of research at the investment adviser Killik & Co in Dubai, says: “Although we believe the US Federal Reserve is keen to raise interest rates, it may have missed its window for doing so.”
If monetary policy is kept looser for longer, it could help to sow the seeds of a stock market revival.
Andrew Parry, the head of equities at Hermes Investment Management, says there are positives as well as negatives in recent developments. Brent crude has fallen to a six-and-half-year low of about $43 a barrel, and cheaper oil should put more money into consumers’ pockets, particularly in the West.
“The collapse in stock prices has also restored some value to markets starved of bargains,” says Mr Parry, who also points out that the bond market suffered a rout just a few months ago, but investors have since returned. “This illustrates how succumbing to fear can be dangerous.”
The investment bank JP Morgan Cazenove said this week’s sell-off was overdone because economic fundamentals were better than people thought.
The latest manufacturing data suggests that the euro zone is still recovering, it says, while Chinese house prices and property transactions are stabilising.
Maike Currie, an associate investment director at Fidelity Personal Investing, says volatility always increases as a bull market matures. “Private investors should hold their nerve and look to top up their holdings of stocks or mutual funds at greatly reduced prices.”
She says that in troubled times, investors should remember the investment legend Warren Buffett’s maxim that you should “treat market fluctuations as your friend rather than your enemy”.
Once the dust has settled, expatriate investors will find themselves living in a different world, says Nigel Green, the founder of the independent financial advisory organisation deVere Group. “It appears that we’re entering into a new investment era and, in this environment, investors should expect generally lower returns from property, bonds and the stock market.”
More than six years of rock-bottom interest rates forced savers to shift their money out of underperforming cash into more rewarding investments, Mr Green says. “The combined effect has been to inflate asset prices, from housing to shares to government bonds.”
There are early signs of a property slowdown in Dubai, where prices have fallen by 4 per cent over the past three months, according to figures from the real estate data provider Reidin.
“As ever in times of flux, there will be significant opportunities, but investors may need to accept lower returns,” Mr Green warns, and they should look for mutual funds run by experienced managers with good track records. “They will come into their own in this new era, as they will be able to secure the best stocks at the right time for their clients.”
James Thomas, the regional director at Acuma Wealth Management in Dubai, says slower growth can even be a sign that stock and property markets are finally normalising after being driven upwards by years of central-bank stimulus.
One asset looks set to continue underperforming, Mr Thomas warns. “Cash is unlikely to improve, as interest rates now look set to stay lower for longer. They won’t return towards 5 per cent for a significant time, if at all.”
As Japan found after slashing interest rates to near-zero more than 20 years ago, it can be almost impossible to start raising them again.
Mr Thomas says investors do not need to worry too much about current turbulence, provided they plan to hold any assets for the long term. “Both shares and property should be seen as a medium- to long-term investment, so you shouldn’t have to worry about short-term movements.”
Billions of dollars of stock market value may have been destroyed, but most investors should simply weather the storm.
Avoid the temptation to sell, as that will only turn your paper losses into the real thing and lock you out of any subsequent recovery.
The key is to build a balanced portfolio that you are confident in, then leave it invested for the long term, regardless of what markets throw at you.
If you are feeling bold and have a bit of money to spare, you might even want to take advantage of today’s reduced valuations to top up your portfolio at today’s far cheaper levels. Are you cool-headed enough to do that?
pf@thenational.ae
